Oil Pullback Limited: Cautious Take on De-escalation, Two Key Scenarios in Focus

As the military conflict in the Middle East enters its fourth week, markets are finally seeing tentative signs of de-escalation. In a post on Truth, Trump said “productive discussions” had taken place with Iran regarding a ceasefire, announcing a five-day pause on all military actions targeting Iran’s energy infrastructure. He further added that the Strait of Hormuz could “soon reopen,” potentially under joint US-Iran control.

Following the news, both Brent and WTI spot prices fell around 10% on Monday, but selling pressure did not persist.

So why does market sentiment remain cautious despite the apparent easing signals? How are traders pricing the extended “deadline” into Sunday? And how should we assess the outlook for oil from here?

Political signaling outweighs actual de-escalation

While Trump’s conciliatory tone has offered some relief to markets, Iran’s stance remains relatively firm. Given Trump’s well-known use of TACO strategy to shape expectations, traders largely view this as a form of market signaling—aimed at easing short-term price pressures while keeping strategic leverage intact.

The sharp drop in oil prices reflects a temporary unwind of geopolitical risk premium following positive headlines. However, this looks more like tactical cooling than a trend reversal. The subsequent rebound suggests markets remain focused on physical supply flows and production recovery, rather than political rhetoric alone.

As the news is digested, attention is shifting toward potential developments by Sunday, and how different scenarios may impact pricing and positioning. In my view, this broadly comes down to two key scenarios.

Scenario 1: No material escalation, oil prices ease

This is the outcome most widely anticipated by the market, under which oil prices could retrace under two conditions.

First, a mediated agreement between the US and Iran could allow for a gradual resumption of traffic through the Strait of Hormuz, easing military tensions. Improved supply expectations would become consensus, prompting a rebalancing of supply and demand and a repricing of oil.

Second, if no substantive action is taken by the White House after the deadline—whether due to pressure from a sharp market pullback or political considerations ahead of midterm elections—Trump’s earlier remarks about tolerating higher oil prices would lose credibility.

This would significantly weaken his influence over geopolitical expectations, leading markets to reassess the threat as limited, with risk premiums declining and oil coming under pressure.

That said, the recent rally has not been driven solely by supply disruption fears. Damage to Middle Eastern energy infrastructure continues to affect pricing. Even if the Strait of Hormuz reopens, higher production and storage costs suggest oil is unlikely to return to pre-conflict levels of $65–70/bbl in the near term.

With the price floor likely shifting higher, traders may look to capture pullback opportunities while reassessing new support levels.

Scenario 2: Escalation risks rise, divergence across crude benchmarks

If no agreement is reached before the deadline—or if tensions escalate further—market focus will quickly turn to the scale of potential US actions and Iran’s response.

In this scenario, disruptions in the Strait of Hormuz are likely to persist, increasing the probability of further upside in oil prices. However, divergence across crude benchmarks and regions could become more pronounced.

Many traders estimate that a disruption in Hormuz could reduce global oil supply by around 20%. However, this figure masks important structural differences. Over 75% of shipments through the strait are destined for Asia, meaning the region faces the most immediate physical supply risks.

A surge in spot prices could push Asian buyers to seek alternatives through arbitrage, turning to Atlantic Basin supply—such as West African and North Sea crude priced off Brent.

Redirecting these barrels away from European buyers would require significant premiums, driving Brent prices higher and potentially reinforcing a self-feeding cycle.

Meanwhile, although global buyers may also look to US WTI to fill the gap, export capacity constraints—both at ports and pipelines—mean excess supply would likely remain within the US or flow back inland. As a result, WTI could lag the broader price rally, or even come under pressure if inventories build.

Under this dynamic, Brent could see sustained upside, and in extreme cases, its pricing may detach from fundamentals, becoming a “panic squeeze” proxy. With WTI capped, a clear price gradient between the two benchmarks may emerge—and widen further if tensions persist.

For oil traders, this suggests the need to differentiate across benchmarks when structuring positions.

High volatility likely to persist, watch US-Iran developments

Regardless of how the geopolitical situation evolves, market sensitivity has clearly increased. Until traders can determine whether the upcoming deadline marks a turning point or merely a delay of risk, any headline could trigger sharp price swings.

In the near term, markets will focus on:

• Strait of Hormuz flows: Whether shipping gradually resumes will directly determine the extent and duration of supply disruptions, with implications for inflation and cross-asset markets.
• Substance of US-Iran negotiations: Whether Trump’s extension represents a genuine negotiation window or a tactical delay remains unclear. A lack of progress could raise the risk of a gap move on Monday.

Overall, the market is shifting from pricing worst-case scenarios toward reassessing risk. In the near term, oil is likely to remain in a high-level, wide trading range—making position management the key priority.